Payame Noor University Economic Growth and Development Research 2228-5954 8 30 2018 03 21 The Impact of Economic Instability on the Unofficial Dollarization in Iran's Economy The Impact of Economic Instability on the Unofficial Dollarization in Iran's Economy 101 116 3479 FA Sima Eskandari Sabzi Ph.D. Student in Economics, Sciences and Research Branch, Islamic Azad University, Tehran, Iran Asadolah Farzinvash Professor of Economics, Sciences and Research Branch, Islamic Azad University, Tehran, Iran Kambiz Hojabr Kiani Professor of Economics, Sciences and Research Branch, Islamic Azad University, Tehran, Iran Hamid Shahrestani Associate Professor of Economics, Sciences and Researchs Branch, Islamic Azad University, Tehran, Iran Journal Article 2016 12 26 Economic instability affects the domestic money that economic agents are willing to hold. For example in an uncertain inflationary environment, they prefer to less demand for money and use those asset which has less risk of maintenance, such as foreign currency and foreign assets. The use of foreign currency as a store of value is "dollarization". This study examines the impact of economic instability on the unofficial dollarization in Iran. For this purpose, we estimate the degree of dollarization by Kamin and Ericsson (2003) and El-Erian (1988) method, then obtain a composite macroeconomic instability index with the consumer price index, exchange rate, stock of international reserves, interest rate and budget deficit, then examine by using a vector auto regression model over the period of 1979 to 2014. The results indicate that economic instability affects dollarization positively. The impulse response function shows that a one-standard error shock in instability increases dollarization at first, and gradually reduced. The results of variance decomposition also show that in long term instability index can explain fluctuation of the dollarization. Economic instability affects the domestic money that economic agents are willing to hold. For example in an uncertain inflationary environment, they prefer to less demand for money and use those asset which has less risk of maintenance, such as foreign currency and foreign assets. The use of foreign currency as a store of value is "dollarization". This study examines the impact of economic instability on the unofficial dollarization in Iran. For this purpose, we estimate the degree of dollarization by Kamin and Ericsson (2003) and El-Erian (1988) method, then obtain a composite macroeconomic instability index with the consumer price index, exchange rate, stock of international reserves, interest rate and budget deficit, then examine by using a vector auto regression model over the period of 1979 to 2014. The results indicate that economic instability affects dollarization positively. The impulse response function shows that a one-standard error shock in instability increases dollarization at first, and gradually reduced. The results of variance decomposition also show that in long term instability index can explain fluctuation of the dollarization. https://egdr.journals.pnu.ac.ir/article_3479_7fe0c9da089529c7ab17dd5e6e9a4e56.pdf